VALUE PICK FROM INDIAN STOCK MARKETS

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Monday, June 12, 2017

Courtesy : Economic TimesThe domestic equity market is on a roll with the benchmark indices currently hovering at all-time highs. The highlight of the current rally is undoubtedly the active participation of domestic institutional investors (DIIs), who, along with foreign investors, have collectively invested Rs 84,793 crore (year-to-date) in domestic stocks for the year till May 31, 2017. (Source: Sebi)

Though it’s heartening to see retail investors embrace financial products, especially invest via the SIP route, now is the time to take a look at one’s portfolio. Historical pattern suggests whenever the market rallied on account of increased liquidity, it has always turned volatile in the short run.From a valuation perspective too, the market is no longer cheap. For example: the trailing price-to-earnings (PE) multiple for the S&P BSE500 index is trending above its long-term average with more than 25 per cent of its constituents trading at 40 times their trailing 12-months earnings, which is the highest ever for these names. (Source: BSE)

In such interesting times, it is imperative for investors to revisit some of the investment fundamentals; the important one being striking the right balance between greed and fear while investing. It is always better to exercise caution than be sorry and regret later, particularly, when equity prices are soaring at an all-time high. This rally is happening especially at a time when earnings are yet to catch up.

Over the past three years, India Inc’s earnings growth has not lived up to expectations due to multiple factors. However, going forward, this landscape is likely to improve given the positive macro-economic factors and a steady recovery in the economy. Also, the positive effect of the recent government reforms is likely to further help the recovery process.

Once the earnings growth materialises, there is a possibility that valuations may get realigned with historical valuations.

As Charlie Munger, American investor, businessman, and well known philanthropist, aptly said, “All intelligent investing is value investing – acquiring more than you are paying for. You must value the business in order to value the stock.”When the market has been on a roll, investors often tend to seek more gains from their investments. With the market inching upward to new all-time highs, investors generally tend to become greedy expecting further gains. This may not necessarily be the right move and calls for rebalancing of portfolio.

As the value of the equity component of your portfolio goes up, your original balance can get skewed. However, investors should always keep in mind that no asset class will move in one straight line, be it upward or downwards for a long time. This holds true, especially for financial assets, as the volatility is more pronounced in them.At this point, a retail investor should ideally take a hard look at one’s portfolio. With the rise in the market, the portfolio value may have swelled and one may be tempted to make fresh investments to capture most of the opportunities offered by the market.

But this is the time one has to be cautious and fortify the gains. Given this objective, the right thing to do for retail investors would be to invest in dynamic asset allocation funds/ balanced advantage category of funds. These funds invest in equity or debt as per the attractiveness of that particular asset class and dynamically manage the same. When equities are cheap, the fund allocation towards equity increases in order to tap the available opportunities and vice-versa.

The construct of these funds ensures that an investor has exposure to both debt and equity asset classes within a single fund. The matrix used to arrive at the proportion is generally based on relative attractiveness of each of the asset class and, hence, these funds are dynamically managed.While current market valuations do appear expensive from a short-term perspective, as the market has more or less factored in this year’s earnings growth, long-term investors can consider remaining invested as the economic growth rises to a robust 7 per cent plus, making India an attractive investment destination. Further, the bold economic reforms embarked upon by the government have set the stage right for good times for the Indian equity market.

The
domestic equity market is on a roll with the benchmark indices
currently hovering at all-time highs. The highlight of the current rally
is undoubtedly the active participation of domestic institutional
investors (DIIs), who, along with foreign investors, have collectively
invested Rs 84,793 crore (year-to-date) in domestic stocks for the year
till May 31, 2017. (Source: Sebi)

Sunday, May 14, 2017

The enterprise value - or EV for short - is an indicator of how the market attributes value to a firm as a whole. Enterprise value is a term coined by analysts to discuss the aggregate value of a company as an enterprise rather than just focusing on its current market capitalization. It measures how much you need to fork out to buy an entire public company. When sizing up a company, investors get a clearer picture of real value with EV than with market capitalization.

Why doesn't market capitalization properly represent a firm's value? It leaves a lot of important factors out, such as a company's debt on the one hand and its cash reserves on the other. Enterprise value is basically a modification of market cap, as it incorporates debt and cash for determining a company's valuation.

The CalculationSimply put, EV is the sum of a company's market cap and its net debt. To compute the EV, first calculate the company's market cap, add total debt (including long- and short-term debt reported in the balance sheet) and subtract cash and investments (also reported in the balance sheet).

Market capitalization is the share price multiplied by the number of outstanding shares. So, if a company has 10 shares and each currently sells for $25, the market capitalization is $250. This number tells you what you would have to pay to buy every share of the company. Therefore, rather than telling you the company's value, market cap simply represents the company's price tag.

The Role of Debt and CashWhy are debt and cash considered when valuing a firm? If the firm is sold to a new owner, the buyer has to pay the equity value (in acquisitions, price is typically set higher than the market price) and must also repay the firm's debts. Of course, the buyer gets to keep the cash available with the firm, which is why cash needs to be deducted from the firm's price as represented by market cap.

Think of two companies that have equal market caps. One has no debt on its balance sheet while the other one is debt heavy. The debt-laden company will be making interest payments on the debt over the years. (Preferred stock and convertibles that pay interest should also be considered debt for the purposes of calculating value.) So, even though the two companies have equal market caps, the company with debt is worth more.

By the same token, imagine two companies with equal market caps of $250 and no debt. One has negligible cash and cash equivalents on hand, and the other has $250 in cash. If you bought the first company for $250, you will have a company worth, presumably, $250. But if you bought the second company for $500, it would have cost you just $250, since you instantly get $250 in cash.

If a company with a market cap of $250 carries $150 as long-term debt, an acquirer would ultimately pay a lot more than $250 if he or she were to buy the company's entire stock. The buyer has to assume $150 in debt, which brings the total acquisition price to $400. Long-term debt serves effectively to increase the value of a company, making any assessments that take only the stock into account preliminary at best.

Cash and short-term investments, by contrast, have the opposite effect. They decrease the effective price an acquirer has to pay. Let's say a company with a market cap of $25 has $5 cash in the bank. Although an acquirer would still need to fork out $25 to get the equity, it would immediately recoup $5 from the cash reserve, making the effective price only $20.

Ratio MattersFrankly, knowing a company's EV alone is not all that useful. You can learn more about a company by comparing EV to a measure of the company's cash flow or EBIT. Comparative ratios demonstrate nicely how EV works better than market cap for assessing companies with differing debt or cash levels or, in other words, differing capital structures.

It is important to use EBIT - earnings before interest and tax - in the comparative ratio because EV assumes that, upon the acquisition of a company, its acquirer immediately pays debt and consumes cash, not accounting for interest costs or interest income. Even better is free cash flow, which helps avoid other accounting distortions.

The Bottom Line

The value of EV lies in its ability to compare companies with different capital structures. By using enterprise value instead of market capitalization to look at the value of a company, investors get a more accurate sense of whether or not a company is truly undervalued.

Tuesday, May 9, 2017

Websol
Energy reported the above result for the March Quarter/Year Ended 2017.
Even excluding other income ,company performed exceptionally well . More
than the result, as per notes, company succeeded in its debt reduction
efforts and at the same time doubled its production capacity.

Saturday, May 6, 2017

Courtesy: InvestopediaAlthough value
investing properly executed is a low-to-medium-risk strategy, it still comes
with the possibility of losing money. This section describes the key risks to
be aware of and offers guidance on how to mitigate them.

Key Risks

Basing Your Calculations
on the Wrong Numbers
Since value investing decisions are partly based on an analysis of
financial statements, it is imperative that these calculations be
performed correctly. Using the wrong numbers, performing the wrong
calculation or making a mathematical typo can result in basing an
investment decision on faulty information. Such a mistake could mean
making a poor investment or missing out on a great one. If you aren't yet
confident in your ability to read and analyze financial statements and
reports, keep studying these subjects and don't place any trades until
you're truly ready.

Overlooking
Extraordinary Gains or Losses

Some years, companies will experience unusually large losses
or gains from events such as natural disasters, corporate restructuring or
unusual lawsuits and will report these on the income statement under a label
such as "extraordinary item – gain" or "extraordinary item –
loss." When making your calculations, it is important to remove these
financial anomalies from the equation to get a better idea of how the company
might perform in an ordinary year. However, think critically about these items,
and use your judgment. If a company has a pattern of reporting the same
extraordinary item year after year it might not be too extraordinary. Also, if
there are unexpected losses year after year, this can be a sign that the
company is having financial problems. Extraordinary items are supposed to be
unusual and nonrecurring. Also beware a pattern of write-offs.

Ignoring the Flaws in
Ratio AnalysisEarlier sections of this tutorial have discussed the calculation of
various financial ratios that help investors diagnose a company's
financial health. The problem with financial ratios is that they can be
calculated in different ways. Here are a few factors that can affect the
meaning of these ratios:

They can be
calculated with before-tax or after-tax numbers.

Some ratios
provide only rough estimates.

A company's
reported earnings per share (EPS) can vary significantly depending on how
"earnings" is defined.

Companies differ
in their accounting methodologies, making it difficult to accurately
compare different companies on the same ratios. (Learn more about when a
company recognizes profits in Understanding
The Income Statement.)

Overpaying

One of the biggest risks in value investing lies in overpaying for a stock.
When you underpay for a stock, you reduce the amount of money you could lose if
the stock performs poorly. The closer you pay to the stock's fair market value
– or even worse, if you overpay – the bigger your risk of losing capital.
Recall that one of the fundamental principles of value investing is to build a
margin of safety into all of your investments. This means purchasing stocks at
a price of around two-thirds or less of their inherent value. Value investors
want to risk as little capital as possible in potentially overvalued assets, so
they try not to overpay for investments.

Not Diversifying

Conventional investment wisdom says that investing in individual stocks can be
a high-risk strategy. Instead, we are taught to invest in multiple stocks or
stock indexes so that we have exposure to a wide variety of companies and
economic sectors. However, some value investors believe that you can have a
diversified portfolio even if you only own a small number of stocks, as long as
you choose stocks that represent different industries and sectors of the
economy. Value investor and investment manager Christopher H. Browne recommends
owning a minimum of 10 stocks in his "Little Book of Value
Investing." Famous value investor Benjamin Graham suggested 10 to 30
companies is enough to adequately diversify. On the other hand, the authors of
"Value Investing for Dummies, 2nd. ed.," say that the more stocks you
own, the greater your chances of achieving average market returns. They recommend
investing in only a few companies and watching them closely. Of course, this
advice assumes that you are great at choosing winners, which may not be the
case, particularly if you are a value-investing novice.

Listening to Your
Emotions

It is difficult to ignore your emotions when making investment decisions. Even
if you can take a detached, critical standpoint when evaluating numbers, fear
and excitement creep in when it comes time to actually use part of your
hard-earned savings to purchase a stock. More importantly, once you have
purchased the stock, you may be tempted to sell it if the price falls. You must
remember that to be a value investor means to avoid the herd-mentality
investment behaviors of buying when a stock's price is rising and selling when
it is falling. Such behavior will destroy your returns. (Playing
follow-the-leader in investing can quickly become a dangerous game.

Value-investing
is a long-term strategy. Warren Buffett, for example, buys stocks with the
intention of holding them almost indefinitely. He once said "I never
attempt to make money on the stock market. I buy on the assumption that they
could close the market the next day and not reopen it for five years." You
will probably want to sell your stocks when it comes time to make a major
purchase or retire, but by holding a variety of stocks and maintaining a
long-term outlook, you can sell your stocks only when their price exceeds their
fair market value (and the price you paid for them).

Basing Your Investment Decisions on Fraudulent Accounting Statements

After the accounting scandals associated with Enron, WorldCom and other
companies, it would be easy to let our fears of false accounting statements
prevent us from investing in stocks. Selecting individual stocks requires
trusting the numbers that companies report about themselves on their balance
sheets and income statements. Sure, regulations have been tightened and
statements are audited by independent accounting firms, but regulations have
failed in the past and accountants have become their clients' bedfellows. How
do you know if you can trust what you read?

One
strategy is to read the footnotes. These are the notes that explain a company's financial statements
in greater detail. They follow the statements and explain the company's
accounting methods and elaborate on reported results. If the footnotes are
unintelligible or the information they present seems unreasonable, you'll have
a better idea on whether to pass on the company.

Not Comparing Apples to Apples

Comparing a company's stock to that of its competitors is one way value
investors analyze their potential investments. However, companies differ in
their accounting policies in ways that are perfectly legal. When you're
comparing one company's P/E ratio to another's, you have to make sure that EPS
has been calculated the same way for both companies. Also you might not be able
to compare companies from different industries. If companies use different
accounting principles, you will need to adjust the numbers to compare apples to
apples; otherwise you can't accurately compare two companies on this metric

Selling at the Wrong Time

Even if you do everything right in terms of researching and purchasing your
stocks, your entire strategy can fall apart if you sell at the wrong time. The
wrong time to sell is when the market is suffering and stock prices are falling
simply because investors are panicking, not because they are assessing the
value of the quality of the underlying companies they have invested in. Another
bad time to sell is when a stock's price falls because its earnings have fallen
short of analysts' predictions.

The
ideal time to sell your stock is when shares are overpriced relative to the
company's intrinsic value. However, sometimes a significant change in the
company or the industry that lowers the company's intrinsic value might also
warrant a sale if you see losses on the horizon. It can be tricky not to
confuse these times with general investor panic. Also, if part of your
investment strategy involves passing on wealth to your heirs, the right time to
sell may be never (at least for a portion of your portfolio).

Sunday, April 30, 2017

Building
wealth – it's a topic that sparks heated debate, promotes quirky "get rich
quick" schemes and drives people to pursue transactions they might
otherwise never consider. "Three Simple Steps To Building Wealth" may
seem like a misleading title, but it isn't. While these steps are simple to
understand, they're not easy to follow.

The
Steps

Basically,
building wealth boils down to this: to accumulate wealth over time, you need to
do three things:

1.You need to make it. This means
that before you can begin to save or invest, you need to have a long-term
source of income that's sufficient to have some left over after you've covered
your necessities.

2.You need to save it. Once you have
an income that's enough to cover your basics, you need to develop a proactive
savings plan.

3.You need to invest it. Once you've set
aside a monthly savings goal, you need to invest it prudently.

Step
1: Making Enough Money

This
step may seem elementary, but for those who are just starting out, or are in
transition, this is the most fundamental step. Most of us have seen tables
showing that a small amount regularly saved and compounded over time can
eventually add up to substantial wealth. But those tables never cover the other
sides of the story – that is, are you making enough to save in the first place?
And are you good enough at what you do and do you enjoy it enough that you can
do it for 40 or 50 years in order to save that money?
To begin, there are two types of income – earned and passive. Earned income
comes from what you "do for a living," while passive income is
derived from investments. This section deals with earned income.Those
beginning their careers or in the midst of a career change can think about the
following four considerations to decide how to derive their "earned
income":

1.Consider
what you enjoy. You will perform better and be more likely to succeed
financially doing something you enjoy.

2.Consider
what you're good at. Look at what you do well and how you can use those talents
to earn a living.

3.Consider
what will pay well. Look at careers using what you enjoy and do well that will
meet your financial expectations.

4.Consider
how to get there (educational requirements, etc.). Determine the education
requirements, if any, needed to pursue your options.

Taking
these considerations into account will put you on the right path. The key is to
be open-minded and proactive. You should also evaluate your income situation
annually.

Step
2: Saving Enough of It

You
make enough money, you live pretty well, but you're not saving enough. What's
wrong? There's only one reason why this occurs: your wants exceed your budget.
To develop a budget or to get your existing budget on track, try these steps:

1.Track
your spending for at least a month. You may want to use a financial software
package to help you do this. If not, your checkbook is the best place to start.
Either way, make sure you categorize your expenditures. Sometimes just being
aware of how much you are spending will help you control your spending habits.

2.Trim
the fat. Break down your wants and needs. The need for food, shelter and
clothing are obvious, but you also need to address less obvious needs. For
instance, you may realize you're eating lunch at a restaurant every day.
Bringing your own lunch to work two or more days a week will help you save
money.

3.Adjust
according to your changing needs. As you go along, you probably will find that
you've over- or under-budgeted a particular item and need to adjust your budget
accordingly.

4.Build
your cushion – you never really know what's around the corner. You should aim
to save around three to six months' worth of living expenses. This prepares you
for financial setbacks, such as job loss or health problems. If saving this
cushion seems daunting, start small.

5.Get
matched! Contribute to your employer's and try to get the maximum your employer is
matching. Some employers match 100% of the participant's contribution, and this
can be a big incentive to add even a few dollars each paycheck.

The
most important step is to distinguish between what you really need and what you
merely want. Finding simple ways to save a few extra bucks here and there could
include: programming your thermostat to turn itself down when you're not at
home; using plain unleaded gasoline instead of premium; keeping your tires
fully inflated; buying furniture from a quality thrift shop; and learning how
to cook. This doesn't mean that you have to be thrifty all the time: if you're
meeting savings goals, you should be willing to reward yourself and splurge (an
appropriate amount) once in a while! You'll feel better and be motivated to
make more money.

Step
3: Investing It Appropriately

You're
making enough money and you're saving enough, but you're putting it all in
conservative investments. That's fine, right? Wrong! If you want to build a
sizable portfolio, you have to take on risk, which means you'll have to invest
in equities. So how do you determine what's the right exposure for you?Begin
with an assessment of your situation. The CFA Institute advises investors to
build an Investment Policy Statement. To begin, determine your return and risk
objectives. Quantify all of the elements affecting your financial life
including: household income; your time horizon; tax considerations; cash
flow/liquidity needs; and any other factors that are unique to you.Next,
determine the appropriate asset allocation for you. Most likely you will need
to meet with a financial advisor unless you know enough to do this on your own.
This allocation will be based on the Investment Policy Statement you have
devised. Your allocation will most likely include a mixture of cash, fixed
income, equities and alternative investments.Risk-averse
investors should keep in mind that portfolios need at least some equity
exposure to protect against inflation. Also, younger investors can afford to
allocate more of their portfolios to equities than older investors, as they
have time on their side. Finally,
diversify. Invest your equity and fixed income exposures over a range of
classes and styles. Do not try to time the market. When one style (e.g., large
cap growth) is underperforming the S&P 500, it is quite possible that
another is outperforming. Diversification takes the timing element out of the
game. A qualified investment advisor can help you develop a prudent
diversification strategy.

Saturday, April 22, 2017

Those who study narcotics addiction
have invented the term ‘gateway drug’. It seems that many drug-users start with
mild narcotics like marijuana and gradually move up to harder stuff like heroin
and crack. It so happens that there’s an almost exact equivalent to this in
equity investing as well, except that the first stage is actually beneficial.

The default Indian saver saves all of his or her money in deposits with banks
or post offices or the government. Some of these people—perhaps about two
crores of them—start investing in equity funds. The gateway investment to
equity funds is often a tax-saving fund—one of the so-called ELSS funds.

As ELSS investments come with a lock-in, they are forced to stay put for three
years, which is a reasonably long period to see good gains. For most of these
investors, the idea that equity funds can get you good returns becomes an
obvious. So far, so good.

A certain proportion goes beyond this
gateway stage—generally with the help of equity investment’s equivalent of a
drug dealer. This person often goes by the name of a wealth manager or a
relationship manager or something like that and is generally employed by a bank
or a stockbroker.

The logic given is simple: why are
you wasting your time? Since you know that equity returns are better than a
bank deposit, let me introduce you to the form of equity that can get you the
highest possible returns from equity, which is effendo.

Even though ‘effendo’ sounds like a
magical spell from Harry Potter (like Confundo or Diffindo), it is not. It is
actually the popular way to pronounce F&O, otherwise known as futures and
options, or derivatives. Effendo is closely related to a Harry Potter spell
called Evanesco which makes things vanish.

Effendo can make money vanish as if
by magic, as it regularly does for investors lured into short-term trading
using these types of investment avenues. Actually, effendo does not make money
vanish, as much as it transfers it magically into the bank accounts of your
broker.
Now I know the whole shpiel about how derivatives provide depth and breadth to the
stock markets, but for a vast majority of small investors, they are none of
that. Instead, as Warren Buffet pointed out, they are nothing but financial
weapons of mass destruction. But aren’t derivatives meant to be a good thing?

The answer to that question lies in
one of the distortions that have crept it into the Indian stock markets ever
since derivatives trading began. Derivatives like futures and options can be
used to protect traders against risk, acting like an insurance policy.

However, they can also be used to
enhance risk and returns, effectively as an instrument that offers a chance of
higher gains, but also a high risk of huge losses, including completely wiping
out the investor’s capital.

The real problem is not that using
futures and options in this manner is possible, but that almost every part of
the equities trading industry is dedicated to getting customers into this kind
of trading. Practically every broker—and that definitely includes banks’
‘wealth management’ units—does this and certainly, all the stock exchanges have
spared no effort in getting as many people to trade as speculatively as
possible.

This kind of institutional behaviour
is certainly disappointing, but not surprising. So much of the behaviour of
India’s big financial players is sub-ethical that one suffers from a bit of
outrage fatigue.

However, the important point is that
savers should save themselves from being herded into such kind of trading. It’s
certainly not a natural extension of safe and sensible investing of the kind
that one does in a tax-saving or other equity fund. There will be people who
will try and tell you stories and earn fat commissions out of your money but
it’s your job to show them the door.

Those
who study narcotics addiction have invented the term ‘gateway drug’. It
seems that many drug-users start with mild narcotics like marijuana and
gradually move up to harder stuff like heroin and crack. It so happens
that there’s an almost exact equivalent to this in equity investing as
well, except that the first stage is actually beneficial.